Union Budget 2026: Major Direct Tax Changes That Will Impact Every Taxpayer and Business
- PRAVEEN DILLIBABU
- 2 days ago
- 4 min read
Published: 01 February 2026
Category: Union Budget 2026/Tax Updates
On 1 February 2026, Finance Minister Nirmala Sitharaman presented the Union Budget 2026–27. While headlines focused on infrastructure spending and fiscal numbers, the most meaningful reforms are hidden in the Direct Tax proposals that will come into force from 1 April 2026 under the new Income-tax Act, 2025.
This Budget signals a clear shift:
From litigation-heavy taxation → to digital, trust-based, compliance-friendly taxation.
Here are the most important direct tax changes you should know.
1) Interest on Motor Accident Compensation Becomes Fully Tax-Free
Interest awarded by the Motor Accident Claims Tribunal (MACT) is now completely exempt from income tax.
Earlier, the interest portion was taxable, and TDS was deducted, reducing the actual compensation received by victims and legal heirs. This amendment ensures full relief without tax deduction.
2) Long-Standing TDS Confusion on Manpower Supply Finally Resolved
Supply of manpower is now clearly classified under “work” (contractor category) and not as a technical/professional service.
This removes years of disputes where higher TDS rates were demanded by reclassifying manpower services.
A major relief for:
Staffing companies
Security services
Housekeeping contracts
Outsourcing businesses
3) Lower / Nil TDS Certificate Process Goes Fully Online
The process for obtaining lower or nil TDS certificates is now completely digital:
Online application
Electronic certificate issuance
Faster approval without physical follow-up
This especially benefits startups, senior citizens, and small taxpayers who depend on cash flow.
4) Single 15G / 15H Declaration Through Depository
Investors no longer need to submit Form 15G/15H to multiple banks and companies.
A single declaration to the depository will be electronically shared with all payers, drastically reducing compliance burden.
5) Property Purchase from NRI Simplified – No TAN Required
Earlier, even a one-time buyer purchasing property from a non-resident had to obtain TAN for TDS compliance.
Now, PAN-based compliance is sufficient — a big relief for individual home buyers.
6) PF / ESI Employee Contribution – Major Litigation Finally Closed
Employee contribution to PF/ESI will be allowed as a deduction up to the due date of filing the income tax return.
This resolves years of disallowances caused by the mismatch between labour law due dates and tax law interpretation.
A huge relief for employers and payroll compliance.
7) Updated Return Allowed Even After Reassessment Notice
Taxpayers can now file an Updated Return even after receiving a reassessment notice by paying additional tax.
This provides a structured exit from litigation and avoids penalty proceedings.
8) Updated Return Permitted to Reduce Previously Claimed Loss
Earlier, updated returns that resulted in a loss were not allowed. Now, taxpayers can correct overstated losses, improving accuracy and preventing future disputes.
9) Penalty Structure Rationalized – Many Penalties Converted into Fees
The approach shifts from harsh punishment for technical defaults to a more predictable, fee-based compliance system.
This reduces fear, litigation, and unnecessary penalty exposure.
10) Special Benefits for Cooperative Societies
Continuity of existing slab rates
New optional 22% concessional tax regime
No TDS on interest paid to cooperative banks
A strong push for strengthening the cooperative ecosystem.
11) Foreign Asset Disclosure Window for Small Taxpayers
A special compliance window is introduced for small taxpayers holding:
ESOPs / RSUs abroad
Dormant foreign bank accounts
Minor overseas investments
This helps avoid issues under Black Money law for inadvertent non-compliance.
12) Big Push for IFSC (GIFT City)
Tax holiday extended to 20 years
Post-holiday concessional tax rate of 15%
This positions India as a competitive global financial services hub.
13) MAT Rationalization – Rate Reduced to 14%
MAT is treated as final tax under the old regime, and the rate is reduced to 14%, thereby simplifying MAT credit complications for companies.
14) Buyback of Shares Now Taxed as Capital Gains
Buyback proceeds will now be taxed as capital gains instead of dividend income, aligning taxation with economic reality.
15) No Interest Deduction Against Dividend / Mutual Fund Income
If you borrow money (take a loan) and use that money to invest in shares or mutual funds just to earn dividends or income, you cannot claim the loan interest as a tax deduction anymore.
Earlier (loophole): People used to take loans, invest in dividend-yielding assets, earn income, and reduce their taxable income by claiming the interest paid on the loan.
Now: Interest paid on borrowed funds cannot be set off against dividend or mutual fund income.
What this means: The government has closed a tax-planning route in which investments were made using loans mainly to reduce tax, not for genuine investment.
16) Increase in STT on Derivatives
Securities Transaction Tax (STT) on derivatives trading is increased to curb excessive speculation. This will directly impact F&O traders.
Final Takeaway
Union Budget 2026 does not offer flashy exemptions or tax slab changes.
Instead, it removes more than 20 long-standing practical problems faced daily by:
Employers
Investors
Property buyers
Cooperatives
MSMEs
Taxpayers under scrutiny
This is the beginning of a simpler, digital, predictable, litigation-free tax regime under the Income-tax Act, 2025.
If you want to understand how these changes affect your tax planning, payroll compliance, property transactions, or business structure, feel free to reach out to us.
Need Help Understanding How Budget 2026 Affects You?
Whether you are a business owner, MSME, employer, investor, or salaried taxpayer, the new changes under the Income-tax Act, 2025, can significantly impact your tax planning, compliance, and financial decisions from 1 April 2026.
Get personalized guidance and practical support from our team.
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